ICT and Economic Growth

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ICT and Economic Gr owth

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In 2000, at the height of the new economy, information and communications technology (ICT) was hailed as a technology that would radically transform OECD economies and bring large economic benefits. The recent slowdown has laid to rest several of the myths surrounding ICT: the business cycle is not dead, stock market valuations must be backed by profits, and the ICT sector is not immune to downturns. But this should not distract from the structural changes and economic benefits that have already accompanied the spread of ICT and that continue to this date.

This report examines the impacts of ICT on business performance and the policies that can help seize its benefits. It examines the impacts that ICT has already had on economic performance, analyses why some countries have invested more in ICT than others and why only some countries have thus far clearly seen its benefits. It argues that ICT remains an important technology for the years ahead, as ICT networks have now spread throughout the economy. What counts now is how the technology should be made to work.

The book argues forcefully that ICT is no panacea but a technology that can help business transform and enhance performance. But this transformation will only occur in a competitive environment, and when investments in ICT are accompanied by organisational changes, investment in skills and good management. The book argues for a comprehensive policy strategy to seize the benefits of ICT.

Information and Communications Technologies

ICT and Economic Growth

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Information and Communications Technologies

ICT and Economic Growth

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ICT and Economic Growth

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AND DEVELOPMENT

Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed:

– to achieve the highest sustainable economic growth and employment and a rising standard of living in member countries, while maintaining financial stability, and thus to contribute to the development of the world economy;

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Publié en français sous le titre : Les TIC et la croissance économique

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Foreword

The 2001 OECD Ministerial report, "The New Economy: Beyond the Hype", concluded that information and communications technologies (ICT) are important, with the potential to contribute to more rapid growth and productivity gains in the years to come. Both the 2001 and 2002 OECD Ministerial meetings reiterated the importance of ICT for growth performance and requested the OECD to continue its work in this area. A request for further work on ICT and business performance was also made to the OECD in the autumn of 2001, by the US Secretary of Commerce, Mr. Evans.

This report, which responds to OECD Ministers, revisits the contribution made by ICT to economic performance using new and more recent data to assess the degree to which the findings that appeared valid at the end of 2000 remain intact. The report also examines whether the policy conclusions from the previous OECD work require adjustment in the current economic environment, and what measures OECD governments should take to seize the benefits of ICT. The findings and policy implications of the work reaffirm and elaborate those of the OECD growth study.

The report draws on work carried out in the OECD Directorate for Science, Technology and Industry, as well as work by statistical offices and research institutions in 13 OECD countries. Dirk Pilat was the principal author of the report. Important contributions were received from Alessandra Colecchia, Andrew Devlin, Frank Lee, Paul Schreyer, Colin Webb and Andrew Wyckoff. Comments were received from across the OECD Secretariat. Drafts of this report were discussed by the Committee for Industry and Business Environment and the Committee for Information, Computer and Communications Policy. Participants at these meetings provided useful comments. A grant for this work by the US Department of Commerce is gratefully acknowledged.

This work could not have been completed without the contributions of statisticians and researchers in many OECD member countries. This report highlights their achievements and is dedicated to their work.

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Main findings

The 2001 OECD Ministerial report, “The New Economy: Beyond the Hype”, concluded that information and communications technology (ICT) is important and has the potential to contribute to more rapid growth and productivity gains in the years to come. Both the 2001 and 2002 OECD Ministerial meetings reiterated the importance of ICT for growth performance and requested the OECD to continue its work in this area. A specific request for further work on ICT and business performance was made to the OECD in the autumn of 2001, by the US Secretary of Commerce, Mr. Evans. This report, which responds to OECD Ministers and Secretary Evans, revisits the contribution made by ICT to economic performance using more recent data to assess the degree to which the empirical findings that appeared valid at the end of 2000 remain in tact. It draws on a range of new statistics and empirical analysis that was not available for prior OECD work. This includes new empirical analysis with official firm-level data that has been carried out through an OECD-led team of researchers and statistical offices in 13 OECD countries. The study also incorporates new evidence from official statistics on the use of ICT and e-commerce by firms, which were also not available for previous work. The report also examines whether the policy conclusions from the previous OECD work require adjustment in the current economic environment. The findings and policy implications of the work are summarised below; they reaffirm and elaborate those of the OECD Growth Study.

Empirical messages

ICT continues to have strong impacts on performance

The recent slowdown has laid to rest several myths regarding the new economy: the business cycle is not dead, stock market valuations must be realistic and backed by sound profit expectations, and the ICT sector is not immune to downturns. But this should not distract from the economic benefits that have already accompanied the spread of ICT and the continued importance of ICT for growth in the years to come. It may be too early to tell how the role of ICT in growth and productivity performance will develop in the first decade of the 21st century. Some general trends can be observed, however, that suggest that ICT will continue to be a driver of growth:

● Productivity growth in the United States, the main example of ICT-led growth and productivity improvements, has continued to be strong during

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the recent slowdown, suggesting that part of the acceleration in productivity growth over the second half of the 1990s was indeed structural. Productivity growth in Australia and Canada, both countries characterised by ICT-intensive growth, was also strong over the recent past.

● ICT networks have now spread throughout much of the OECD business sector, and will increasingly be made to work to enhance productivity and business performance. Technological progress in ICT goods and services is continuing at a rapid pace, driving prices down and leading to a wide range of new applications. For example, business-to-consumer e-commerce continues to gain in importance, broadband is diffusing rapidly, and activity in the telecommunications sector continues to grow. Moreover, several applications, such as broadband and e-commerce, are still in their early stages and may have a large potential for future growth.

● While ICT investment has dropped off during the recent slowdown, the release of increasingly powerful microprocessors is projected to continue for the foreseeable future, which will encourage ICT investment and support further productivity growth. Nevertheless, the level of ICT investment may well be lower than that observed prior to the slowdown, however, as the 1995-2000 period was characterised by some one-off investment peaks, e.g.investments related to Y2K and the diffusion of the Internet. On the other hand, some countries may still have scope for catch-up; by 2000, Japan and the European Union area invested a similar share of total investment in ICT than the United States did in 1980.

● Further technological progress in ICT production will imply a continued positive contribution of the ICT manufacturing sector to multifactor productivity (MFP) growth, notably in countries with large ICT-producing sectors such as Finland, Ireland, Japan, Korea, Sweden and the United States.

The impacts of ICT differ markedly across OECD economies

Despite the importance of ICT, there continue to be marked differences in the diffusion of ICT across OECD countries. New OECD data show that the United States, Canada, New Zealand, Australia, the Nordic countries and the Netherlands typically have the highest rates of diffusion of ICT. Many other OECD countries lag in the diffusion of ICT and have scope for greater uptake. It is likely that the largest economic benefits of ICT should be observed in countries with high levels of ICT diffusion. However, having the equipment or networks is not enough to derive economic benefits. Other factors, such as the regulatory environment, the availability of appropriate skills, the ability to change organisational set-ups, as well as the strength of accompanying innovations in ICT applications, affect the ability of firms to seize the benefits of ICT.

Consequently, countries with equal ICT diffusion will not always have similar impacts of ICT on economic performance.

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The measured economic impacts of ICT that have been observed thus far differ markedly across OECD countries. Three impacts of ICT on economic growth can be distinguished. First, investment in ICT adds to the capital stock that is available for workers and thus helps raise labour productivity. ICT investment accounted for between 0.3 and 0.8 percentage point of growth in GDP per capita over the 1995-2001 period. The United States, Canada, the Netherlands and Australia received the largest boost; Japan and the United Kingdom a more modest one, and Germany, France and Italy a much smaller one. Investment in software accounted for up to a third of the contribution of ICT capital.

Second, the ICT-producing sector plays an important role in some OECD countries, although it is small in most. Having an ICT-producing sector can be important, since it has been characterised by rapid technological progress and very strong demand. In Finland, Ireland and Korea, close to 1 percentage point of aggregate labour productivity growth in the 1995-2001 period was due to ICT manufacturing. In the United States, Japan and Sweden, the ICT- producing sector also contributed significantly to productivity growth.

Third, new evidence from an OECD-led consortium of researchers in 13 OECD countries demonstrates that the use of ICT throughout the value chain contributes to improved firm performance. The smart use of ICT can help firms increase their overall efficiency in combining labour and capital, or multi-factor productivity (MFP). ICT use can also contribute to network effects, such as lower transaction costs and more rapid innovation, which can improve MFP. In some countries, notably the United States and Australia, there is evidence that sectors that have invested most in ICT, such as wholesale and retail trade, have experienced more rapid MFP growth.

Firm-level studies also show that the use of ICT may help efficient firms gain market share at the cost of less productive firms, raising overall productivity. In addition, the use of ICT may help firms expand their product range, customise the services offered, or respond better to demand, i.e.to innovate. Moreover, ICT may help reduce inventories or help firms integrate activities throughout the value chain. These studies also show that ICT is part of a broader range of changes that help enhance performance. The impacts of ICT depend on complementary investments, e.g.in appropriate skills, and on organisational changes, such as new strategies, new business processes and new organisational structures. Firms adopting these practices tend to gain market share and enjoy higher productivity gains than other firms.

ICT use by firms is also closely linked to the ability of a company to adjust to changing demand and to innovate. Users of ICT often help make their investments more valuable through their own experimentation and innovation, e.g.the introduction of new processes, products and applications. Without this

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process of “co-invention”, which often has a slower pace than technological innovation, the economic impact of ICT would be more limited. Firms that have introduced process innovations in the past are often particularly successful in using ICT; in Germany, the impact of ICT investments on output was about four times higher in firms introducing innovations as in other firms. The impacts of ICT on innovation are particularly important in services, as ICT helps in re- inventing business processes and developing new applications.

The positive impacts of ICT use on firm performance are not limited to the United States, where the macroeconomic impacts of ICT are considered largest, but are found in many OECD countries. This may be caused by several factors.

First, aggregation across industries may disguise some of the impacts of ICT, as strong effects in some industries may be counterbalanced by weak effects in others. Second, the size of the measured impact at the firm level may be smaller outside the United States, as networks are often less developed and conditions for ICT to become effective may be less well established. This would lead to a smaller macroeconomic impact. Third, the impacts of ICT may be insufficiently picked up in data outside the United States, e.g.due to differences in the measurement of output in the services sector. Fourth, countries outside the United States may not yet have benefited from network – or spillover – effects that could create a gap between the impacts of ICT at the level of individual firms and those that are measured at the macroeconomic level. Such spillover effects could show up as benefits for downstream firms and consumers, and would thus not be picked up in the evidence for individual firms using ICT. Finally, in a large and highly competitive market such as the United States, firms investing in ICT may not always be the main beneficiaries of their investment. Consumers may extract a large part of the benefits, in the form of lower prices, better quality, improved convenience, and so on. In countries with less competition, firms might be able to extract a greater part of the returns, and spillover effects might be more limited.

ICT is no panacea

Firms may well overinvest in ICT, either in an effort to compensate for lack of skills or competitive pressure, or because they lack a clear market strategy. However, ICT is no panacea, but a technology that can be made to work to enhance business performance. Evidence for Germany shows that firms that were able to extract the benefits from ICT were those that had already successfully innovated, i.e.changed their products and processes.

Moreover, ICT requires many other changes to make it work.

It also takes time to adapt to ICT, e.g.in changing organisational set-ups and worker-specific skills. Firms that adopted network technologies several years ago, notably large firms, have often already been able to make the technology work, whereas more recent adopters are still adapting their organisation, management or skills. Evidence for the United Kingdom shows that among the firms that had

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already adopted ICT technologies in or before 1995, over 50% purchased through electronic networks in 2000. For firms that only adopted ICT in 2000, less than 20% purchased through electronic networks in 2000. This also suggests that some of the benefits of prior ICT investments may still emerge in the future.

The impacts of ICT are affected by differences in the business environment

The firm-level evidence also confirms that there are important cross- country differences in firms’ use of ICT. New firms in the United States seem to experiment more with business models than those in other OECD countries; they start at a smaller scale than European firms, but grow much more quickly when successful. This may be linked to less aversion to risk in the United States, linked to its financial system, which provides greater opportunities for risky financing to innovative entrepreneurs. Moreover, low regulatory burdens enable US firms to start at a small scale, experiment, test the market and their business model, and, if successful, expand rapidly. Moreover, if they do not succeed, the costs of failure are relatively limited. In contrast, firms in many other OECD countries are faced with high entry and exit costs. In a period of rapid technological change, greater scope for experimentation may enable new ideas and innovation to emerge more rapidly, leading to faster technology diffusion.

The empirical analysis also points to several other factors that affect firms’ investment and the diffusion of ICT. These can be divided into several categories:

● Factors related to the direct costs of ICT, e.g.the costs of ICT equipment, telecommunications or the installation of an e-commerce system.

● Costs and implementation barriers related to enabling factors, e.g.linked to the availability of know-how or qualifie d pe rsonnel, the sc ope for organisational change, or the scale of accompanying innovations in ICT applications.

● Factors related to risk and uncertainty, e.g.the security of doing business online or the uncertainty of payments, delivery and guarantees online.

● Factors related to the nature of the businesses. ICT is a general-purpose technology, but is more appropriate for some activities than for others. ICT may not fit in all contexts and specific applications, such as electronic commerce, may not be suited to all business models.

● Factors related to competition. A competitive environment is more likely to lead a firm to invest in ICT, as a way to strengthen performance and survive, than a more sheltered environment. Competition also puts downward pressure on the costs of ICT, thus promoting its diffusion.

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Policy implications

The analysis confirms and reaffirms the findings of the OECD work on growth, and its policy conclusions as regards ICT diffusion and economic growth. The main policy conclusions that can be drawn are:

1.Competition in ICT goods and services needs to be strengthened. Competition in ICT goods and services requires attention, as continued technological change is creating new challenges to competition in many markets.

2.The business environment needs to be improved. This includes, inter alia, having an environment that provides access to finance, allows firms to change the organisation of functions and tasks, helps workers acquire the skills they need in a rapidly changing global environment, and promotes good management practices. Rigid regulations of product and labour markets that impede reorganisation or competition between firms also need to be addressed. The experience of countries such as Australia shows that structural reform is key in harnessing the new dynamism that is associated with ICT. Firm creation also needs to be fostered. Experimentation and competition are key in selecting those firms that seize the benefits of ICT and in making them flourish and grow. In the current time of rapid technological change, greater scope for experimentation may enable new ideas and innovation to emerge more rapidly, leading to faster technology diffusion. Barriers to the entry, exit and growth of firms therefore need to be addressed. Moreover, competition needs to be strengthened. Competition not only helps lower the costs of ICT products and services, which fosters diffusion, it also strengthens pressures on firms to improve performance and change conservative attitudes.

3.Security and trust need to be boosted. Concerns on security, privacy and authentification continue to affect the uptake and use of ICT and should remain a priority for policy.

4.Barriers to the effective use of ICT in services require attention. Sector-specific regulations reduce the development of new ICT applications and limit the capability of firms to seize the benefits of ICT. Further reform of regulatory structures is needed to promote competition and innovation, and to reduce barriers and administrative rules for new entrants and start-ups.

5.Innovation needs to be harnessed to draw the benefits from ICT. ICT is closely linked to the ability of firms to innovate, i.e.introduce new products, services, business processes, and applications. Firms that have already innovated achieve much better results from ICT than those that have never innovated. Policies to harness the potential of innovation, as outlined in the OECD Growth Study, are thus of great importance in seizing the benefits of ICT. To strengthen innovation, policy needs to give greater priority to fundamental research, improve the effectiveness of public R&D funding and promote the flow of knowledge between science and industry.

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Introduction

The 2001 OECD Ministerial report “The New Economy: Beyond the Hype”

concluded that information and communications technology (ICT) is important and has the potential to contribute to more rapid growth in the future. Both the 2001 and 2002 OECD Ministerial meetings reiterated the importance of ICT for growth performance and requested the OECD to continue its work on ICT. A specific request for further work on ICT and business performance was also made to the OECD in the autumn of 2001, by the US Secretary of Commerce, Mr. Evans. This report responds to these requests and examines whether ICT is still important now the hype of the new economy is over. It provides new evidence on the factors that affect the diffusion of ICT across OECD countries, the economic impacts of ICT, the factors that influence these impacts, and the policies that can help countries in seizing the benefits from ICT.

This study differs from previous OECD work on growth and the role of ICT as it considers a range of questions that were not explicitly addressed in the previous work by the OECD. For example, why have some OECD countries invested more in ICT than others? What characterises firms that adopt ICT?

Which technologies are they using and for which purpose? What factors help firms in seizing the benefits from ICT? How precisely does ICT affect firm performance, e.g.in strengthening productivity and in increasing market shares? And what policies are key in helping firms seize the benefits of ICT?

Many of these questions can not easily be examined with the macroeconomic and sectoral data that were used in previous OECD work.

Firm-level data are often necessary, since they allow interactions at the firm level to be examined. For example, the role of ICT in helping firms gain market share can only be analysed with firm-level data, as can the role of organisational change. Studies drawing on firm-level evidence can thus contribute to a better understanding of the drivers of economic performance, e.g.the interaction between ICT, human capital, organisational change and innovation, and thus to better, evidence-based, policy making.

The report also draws on a range of new data. First, it draws on new empirical analysis with official firm-level data that has been carried out through an OECD-led team of researchers and statistical offices in 13 OECD

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countries, thus complementing the sectoral and aggregate analysis.* Second, the study incorporates new evidence from official statistics on the use of ICT and e-commerce by firms, which were not available for previous work. Third, it draws, to the extent possible, on the latest available data to examine the contribution of ICT to growth performance in recent years.

Chapter 1 of this report examines the diffusion of ICT across OECD countries. It uses official statistics, which may differ substantially from previously published private estimates of ICT diffusion. It shows that ICT networks continue to diffuse throughout the OECD area, even during a period of slower growth. However, large differences in the uptake of technologies persist across the OECD, both between and within OECD countries. Cost differentials and structural differences are among the factors explaining these differences, as is the state of the business environment in different OECD countries.

Chapter 2 provides evidence on the impact of ICT at the macroeconomic and sectoral level, updating and extending previous OECD work. It shows that ICT investment has contributed to growth and labour productivity in all OECD countries for which data are available, but more in the United States than in any other OECD country. Moreover, rapid technological progress in the ICT- producing industry has contributed to rapid productivity growth in some OECD countries, notably the United States, Finland, Ireland, Korea and Sweden. In a few countries, notably the United States and Australia, there is also evidence that sectors that have invested much in ICT, for example wholesale and retail trade, have experienced more rapid productivity growth.

These impacts of ICT on productivity have not disappeared with the recent slowdown; part of the acceleration in aggregate productivity growth in certain OECD countries, notably the United States, is structural and could continue in the years to come.

Chapter 3 provides evidence on the contribution of ICT use to business performance, based on detailed firm-level studies. It demonstrates that the use of ICT indeed contributes to improved business performance, but only when it is complemented by other investments and actions at the firm level, such as changes in the organisation of work and changes in workers skills.

The chapter also shows that ICT is no panacea; investment in ICT does not compensate for poor management, lack of skills, lack of competition, or a low ability to innovate. Not all firms will therefore succeed in generating returns from their ICT investments; many will fail. In addition, drawing the benefits from ICT investment takes time. Moreover, there are important cross-country

* These countries are: Australia, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, United Kingdom and United States. See Box 3.2 for details.

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differences in firms’ use of ICT. Firms in the United States are characterised by a much higher degree of experimentation in their use of ICT than European firms; they take higher risks and opt for potentially higher outcomes.

Chapter 4 draws implications from the empirical evidence presented in Chapters 1 to 3 for policy makers. It argues that governments should reduce unnecessary costs and regulatory burdens on firms to create a business environment that promotes productive investment. This involves policies to enable organisational change, to strengthen education and training systems, to encourage good management practices, and to foster innovation, e.g.in new applications, that can accompany the uptake of ICT. Moreover, policy should foster market conditions that reward the successful adoption of ICT; a competitive environment is key for this to happen. Governments will also need to work with business and consumers to shape a regulatory framework that strengthens confidence and trust in the use of ICT, notably electronic commerce. Policies to foster growth in services are important too, as ICT offers a new potential for growth in the service sector, providing that regulations that stifle change are adjusted or removed. Finally, the report reaffirms the importance of economic and social fundamentals as the key to lasting improvements in economic performance. A short set of conclusions completes the report.

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Industries and Firms

Chapter 1 The diffusion of ICT in OECD economies

Abstract.

This chapter examines the diffusion of ICT across OECD countries. It uses official statistics, which may differ substantially from previously published private estimates of ICT diffusion. It shows that ICT networks continue to diffuse throughout the OECD area, even during a period of slower growth. However, large differences in the uptake of technologies persist across the OECD, both between and within OECD countries. Cost differentials and structural differences are among the factors explaining these differences, as is the state of the business environment in different OECD countries.

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The state of ICT diffusion

The economic impact of ICT is closely linked to the extent to which different ICT technologies have diffused across OECD economies. This is partly because ICT is a network technology; the more people and firms that use the network, the more benefits it generates. The diffusion of ICT currently differs considerably between OECD countries, since some countries have invested more or have started earlier to invest in ICT than other countries.

A core indicator of ICT diffusion is the share of ICT in investment.

Investment in ICT establishes the infrastructure for the use of ICT (the ICT networks) and provides productive equipment and software to businesses.

While ICT investment has accelerated in most OECD countries over the past decade, the pace of that investment differs widely. The data show that ICT investment rose from less than 15% of total non-residential investment in the early 1980s, to between 15% and 30% in 2001. In 2001, the share of ICT investment was particularly high in the United States, the United Kingdom, Sweden, the Netherlands, Canada and Australia (Figure 1.1). ICT investment in many European countries was substantially lower than in the United States.

The high growth of ICT investment has been fuelled by a rapid decline in the relative prices of computer equipment and the growing scope for the application of ICT. Due to rapid technological progress in the production of key ICT technologies, such as semi-conductors, and strong competitive pressure in their production,¹ the prices of key technologies have fallen by between 15 and 30% annually, making investment in ICT attractive to firms. The benefits of lower ICT prices have been felt across the OECD, as both firms investing in these technologies and consumers buying ICT goods and services have benefited from lower prices. The lower costs of ICT are only part of the picture; ICT is also a technology that offers large potential benefits to firm, e.g.in enhancing information flows and productivity. Chapter 2 examines the impact of ICT investment on economic growth in more detail.

A second determinant of the economic impacts associated with ICT is the size of the ICT sector, i.e.the sector that produces ICT goods and services.

Having an ICT-producing sector can be important, since ICT-production has been characterised by rapid technological progress and has been faced with very strong demand. The sector has therefore grown very fast, and made a large contribution to economic growth, employment and exports. Moreover, having a strong ICT sector may help firms that wish to use ICT, since the close

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proximity of producing firms might have advantages when developing ICT applications for specific purposes. In addition, having a strong ICT sector should also help generate the skills and competencies needed to benefit from ICT use. And it could also lead to spin-offs, as in the case of Silicon Valley or in other high technology clusters. Having an ICT sector can thus support growth, although previous OECD work has shown that it is not a prerequisite (OECD, 2001a).

In most OECD countries, the ICT sector is relatively small, although it has grown rapidly over the 1990s.² In 2000, value added in the ICT sector represented between 4% and 17% of business sector value added (Figure 1.2).

Moreover, about 6-7% of total business employment in the OECD area can be attributed to ICT production. Trade in ICT has also grown very rapidly, growing from just over 12% of total trade in 1990, to almost 18% in 2000 (OECD, 2002a).

Chapter 2 examines the contribution of the ICT-producing sector to economic performance in more detail.

A third factor that affects the impact of ICT in different OECD countries is the distribution of ICT across the economy. In contrast to Solow’s famous remark, “you see computers everywhere but in the productivity statistics”

Figure 1.1. ICT investment in selected OECD countries As a percentage of non-residential gross fixed capital formation, total economy

Note:Estimates of ICT investment are not yet fully standardised across countries, mainly due to differences in the capitalisation of software in different countries. See Ahmad (2003).

1. Or latest available year.

Source:OECD, Database on Capital Services.

1990 2001¹

1980 30

25

20

15

10

5

0

Portugal Austria Ireland Spain Italy Greece Japan

GermanyBelgiumFinlandDenmarkAustraliaCanada Netherlands

Sweden United Kingdom France

United States

1990 2001¹

1980 30

25

20

15

10

5

0

United States

1990 2001¹

1980 30

25

20

15

10

5

0

United States

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(Solow, 1987), computers are, in fact, heavily concentrated in the service sector. Figure 1.3 shows evidence for the United States. It shows the share of the total stock of equipment and software that is accounted for by IT equipment and software (excluding communications equipment). The graph shows that more than 30% of the total stock of equipment and software in legal services, business services and wholesale trade consists of IT and software. Education, financial services, health, retail trade and a number of manufacturing industries (instruments and printing and publishing) also have a relatively large share of IT capital in their total stock of equipment and software. The average for all private industries is just over 11%. The goods- producing sectors (agriculture, mining, manufacturing and construction) are much less IT-intensive; in several of these industries less than 5% of total equipment and software consists of IT.

The relative distribution of ICT investment across sectors for other OECD countries is not very different for other OECD countries (Van Ark et al., 2002;

Pilat et al., 2002); services sectors such as wholesale trade and financial services are typically the most intensive users of ICT.³ This may suggest that any impacts on economic performance might be more visible in the services

Figure 1.2. Share of the ICT sector in value added, non-agricultural business sector, 2000

*1999. **1998.

1. Excludes rental of ICT (ISIC 7123).

2. Includes postal services.

3. Excludes ICT wholesale (ISIC 5150).

4. Includes only part of computer-related activities.

5. 2000-2001.

Source:OECD (2002a), Measuring the Information Economy, www.oecd.org/sti/measuring-infoeconomy

% 20

15

10

5

0 Ireland*

1

Korea*

1

United StatesNew Zealand

2

Sweden Hungar

y*

United Kingdom NetherlandsBelgium

1

OECD 25Japan

3, 4

Czech Republic

1,3

Nor way Canada**

EU 14 Denmark

Finland France

Portugal*

1

Austria Australia

5

Spain Italy Germany*

1, 3

Mexico

Slovak Republic*

1, 3

Greece*

1, 2, 3

% 20

15

10

5

0 Ireland*

1

Korea*

1

2

Sweden Hungar

y*

1

OECD 25Japan

3, 4

Czech Republic

1,3

Nor way Canada**

EU 14 Denmark

Finland France

Portugal*

1

Austria Australia

5

1, 3

Mexico

Slovak Republic*

1, 3

Greece*

1, 2, 3

% 20

15

10

5

0 Ireland*

1

Korea*

1

2

Sweden Hungar

y*

1

OECD 25Japan

3, 4

Czech Republic

1,3

Nor way Canada**

EU 14 Denmark

Finland France

Portugal*

1

Austria Australia

5

1, 3

Mexico

Slovak Republic*

1, 3

Greece*

1, 2, 3

(22)

sectors than in other parts of the economy. Nevertheless, ICT is commonly considered to be a general-purpose technology, as all sectors of the economy use information in their production process, which implies that all sectors might be able to benefit from the use of ICT. Chapters 2 and 3 return to the sectoral aspects of ICT use.

The distribution of ICT also differs according to the size of firms. Smaller firms are typically less ICT-intensive than large firms. This is partly because large firms have more scope for improving communication flows within the firm, e.g.establishment of intra-firm networks, or by outsourcing different tasks, e.g.creation of extranets. But large firms also invest more in ICT than small firms since ICT investment is risky and uncertain, which may be more difficult to bear for small firms. This may obviously imply that the impacts of ICT use could be larger for large firms than for small firms. Chapter 3 provides further evidence on this issue.

One further indicator that points to the uptake of ICT is the number of secure servers in each country (Figure 1.4). This measures the number of servers that use secure software for purchasing goods and services or transmitting privileged information over the Internet, e.g.credit card details. It therefore provides an indication of the development of Internet-based activity

Figure 1.3. Information technology as a percentage of all stock of equipment and software, United States, 2001

Source:Bureau of Economic Analysis, US Department of Commerce, Fixed Assets Tables, www.bea.doc.gov/

40

30

20

10

0

Legal ser vices

Business ser vices

Education Printing, publishing

Instruments

Finance, insurance, real estate Retail trade

Health

All private industriesPersonal ser vices

Durable goods manufacturing

CommunicationsManufacturingConstruction Non-durable goodsElectric, gas, water Wholesale trade

Mining Transportation

Agriculture, forestr y, fishing 40

30

20

10

0

Legal ser vices

Business ser vices

Instruments

Health

30

20

10

0

Legal ser vices

Business ser vices

Instruments

Health

30

20

10

0

Legal ser vices

Business ser vices

Instruments

Health

30

20

10

0

Legal ser vices

Business ser vices

Instruments

Health

30

20

10

0

Legal ser vices

Business ser vices

Instruments

Health

Agriculture, forestr y, fishing

(23)

in different countries, notably the increased security of such activity. By July 2002, over 65% of all secure servers were located in the United States. The United Kingdom had the second largest number of secure servers, accounting for about 6% of the OECD total. Large OECD countries such as Japan, France and Italy had relatively few secure servers, especially when measured on a per capita basis. Among smaller countries, Iceland, New Zealand and Australia have a relatively large number of secure servers. The diffusion of secure servers continued unabated between July 2001 and July 2002, even though ICT investment slowed down during the period.

Another, more accurate, indicator of the development of electronic commerce is the proportion of businesses that use the Internet to purchases and sales (Figure 1.5). This is available for fewer countries, but roughly confirms the findings of the previous graph, with a large number of firms using the Internet for sales or purchases in the Nordic countries (Denmark, Finland, Norway and Sweden) as well as in Australia, the Netherlands and New Zealand. In contrast, only few firms in Greece, Italy, Portugal and Spain use the Internet for sales or purchases, even if many are connected to the Internet.

Figure 1.4. Internet commerce measured by the number of secure Web servers

Source:OECD and Netcraft (www.netcraft.com), December 2002.

500 450 400 350 300 250

-5 200 150 100 50 0

Iceland CanadaAustralia LuxembourgSwitzerland

Slovak Republic

JapanBelgium Mexico

Finland Denmark

Italy

Portugal Hungar

y

United Kingdom

France United States

Secure servers per one million inhabitants

New Zealand

Ireland Sweden GreeceKoreaPoland Turkey

Czech Republic OECD AustriaNor

way Germany

EU Spain

Netherlands New secure servers per million inhabitants, July 1999-July 2001 Secure servers per million inhabitants, July 1999

New secure servers per million inhabitants, July 2001-July 2002

500 450 400 350 300 250

-5 200 150 100 50 0

Slovak Republic

JapanBelgium Mexico

Finland Denmark

Italy

Portugal Hungar

y

United Kingdom

New Zealand

way Germany

EU Spain

500 450 400 350 300 250

-5 200 150 100 50 0

Slovak Republic

JapanBelgium Mexico

Finland Denmark

Italy

Portugal Hungar

y

United Kingdom

New Zealand

way Germany

EU Spain

(24)

Monetary estimates of the importance of electronic commerce are also available for several OECD countries, although these are not yet entirely comparable, depending on the definition used and the coverage of different sectors. The available data suggest that electronic commerce is growing, albeit more slowly than originally envisaged, but still accounts for a relatively small proportion of overall sales. For the few countries that currently measure the value of Internet or electronic sales, total Internet sales in 2000-01 ranged between 0.2% and 2% of total sales. In the fourth quarter of 2002, 1.65% of all retail sales in the United States were carried out through computer-mediated networks, up from 1.3% in the fourth quarter of 2001. Sales via EDI (electronic data interchange) are generally higher than sales via the Internet, with almost all countries reporting EDI sales to be at least twice as high as Internet sales.

Figure 1.5. Proportion of businesses using the Internet for purchases and sales, 2001¹

Percentages of businesses with ten or more employees

Note:The Eurostat survey is based on a selection of industries which changes slightly across countries.

See source for detail.

1. Beginning of 2001 for Internet use, purchases and sales refer to 2000 except for Canada where they refer to 2001, and Denmark and Norway where Internet use refers to 2002 and purchases and sales to 2001.

2. All businesses with 50 and more employees.

3. Use, orders received and placed refer to Internet and other computer mediated networks.

4. All businesses.

5. Orders received and made over the Internet and other computer mediated networks.

Source:OECD, Measuring the Information Economy, 2002, based on Eurostat, E-Commerce Pilot Survey 2001.

% 100

80

60

40

20

0

Denmark Finland Sweden Australia New Zealand

Austria Norway Netherlands

3

Italy

Portugal Canada

4

Spain

United Kingdom

5

Luxembourg Greece Japan

2

Businesses using the Internet Businesses receiving orders over the Internet Businesses ordering over the Internet

% 100

80

60

40

20

0

3

Italy

Portugal Canada

4

Spain

United Kingdom

5

2

% 100

80

60

40

20

0

3

Italy

Portugal Canada

4

Spain

United Kingdom

5

2

(25)

In 2000, electronic sales (including those over all computer-mediated networks) were over 13% in Sweden.

There are many other indicators that point to the role of ICT in different OECD economies, most of which are available in a separate OECD study (OECD, 2002a). In practice, the different indicators are closely correlated and tend to point to the same countries as having the highest rate of diffusion of ICT.

These typically are the United States, Canada, New Zealand, Australia, the Nordic countries and the Netherlands. From this perspective, it is likely that the largest economic impacts of ICT should also be found in these countries.

The diffusion of ICT in OECD countries has been relatively rapid compared to some other technologies, although technological diffusion typically takes considerable time.⁴ For example, over 90% of firms with more than ten employees in Denmark, Japan, Finland and Sweden had Internet access in 2001, only six years after the introduction of the World Wide Web in 1995 (OECD, 2002a). Certain recent ICT technologies (such as the Internet) have thus already reached a large proportion of potential users only a few years after their introduction. Other ICT technologies (such as broadband) are in an earlier stage of the diffusion process, however.

The diffusion of ICT continues across OECD economies, despite the current slowdown. The share of ICT investment in total capital formation grew rapidly until 2000, and remained at a high share of investment even in 2001 a n d 2 0 0 2 , s u g g e s t i n g t h a t I C T inve s t m e n t h a s n ot b e e n a ff e c t e d disproportionally by the slowdown compared with other types of investment.

Evidence for the United States shows that ICT investment was among the first areas of investment to recover in 2002 (BEA, 2003). The continued diffusion of ICT can also be observed in other areas (Figure 1.6). For example, the number of secure servers continued to grow between July 2001 and December 2002, as did the number of broadband subscribers. This rose from 33 million by the end of 2001, to 42 million by June 2002, and to more than 55 million by the end of 2002. This is not to suggest that the ICT sector is not going through a slowdown. However, large ICT networks are now in place throughout the business sector. These will have to be maintained and updated, and will increasingly be made to work and generate economic returns.

Factors affecting the diffusion of ICT

Why is the diffusion of ICT so different across OECD countries? Previous OECD work already noted several factors, such as lack of relevant skills, lack of competition, or high costs (OECD, 2001a). From a firm’s perspective, high costs are particularly important, as they affect the possible returns that a firm can extract from their investment. Firms do not only incur costs in acquiring new technologies, but also in making it effective in the workplace, and in using the